Online Brokerage Price Wars, Part 2

Looks like last month’s price war was just the beginning. Here’s the current state of the stock market pricing war:

Typically, brokers change their prices once every five years. In the past month, they’ve dropped fees twice already. Last week, after Fidelity announced $4.95 trades, Schwab shot back by matching the price. TD Ameritrade, which is more popular for active traders, joined the battle by dropping fees 30%, from $9.99 to $6.95. Their competitor, E*TRADE, remained silent the longest, but ultimately followed TD to $6.95. Here’s what the low prices mean for the industry:

Redefining Discount

TD Ameritrade and E*TRADE are in the process of acquiring Scottrade and OptionsHouse, respectively. Tradeking is being acquired by Ally at the same time. Until this week, Scottrade’s $7.00 and Tradeking’s & OptionsHouse’s $4.95 were some of the lowest commissions in the industry, a major selling point for these firms.

Now that Fidelity and Schwab have dropped to $4.95, their super-discount competitors will have to drop their own fees even further, or find a new way to compete on something other than price. It’s likely that the battle will continue when these players cut fees below $4.95.

Customer Value Reshuffled

With less revenue coming from trade commissions, the definition of “most valued customers” is changing. Brokerages now make more money off of management fees, interest on margin and cash balances, and fees on their ETFs & mutual funds. If you trade stocks yourself, your broker might start cross-selling to you, hoping to make more off of advice and fund fees.

Stockflix, Stockify, Dollar Stock Club

Remember paying $.99 per song? Online brokerages are still using the pay-as-you-go model the music industry abandoned years ago. We predict subscription models will make their way into the brokerage world. Instead of paying per-trade, investors will pay monthly subscription fees that include a certain number of trades, access to research, and other perks.

Less Now, More Later

Brokers should listen to their own advice and start thinking long-term. While a subscription model might not produce huge profits at first, it will provide steady revenue when trading behaviors die down. Per-trade fees generate huge profits when the market is booming, but those profits dry up quickly when the market spooks retail investors.

If you bought E*TRADE stock 10 years ago, you’re down 84%. Adopting a subscription model will save online brokers, and their shareholders, from the volatility that comes with depending on unpredictable market conditions. Instead of worrying about the next fee war, online brokers should start poaching Spotify execs.